Mexico Bond Risk Set to Drop Below Chile for First Time

June 4 (Bloomberg) -- Mexico is on the verge of overtaking
Chile as the safest destination for bond investors in Latin
America.

It cost 0.03 percentage point more this week to protect
Mexico’s bonds against default than debt from Chile, which is
rated four levels higher at AA- by Standard & Poor’s. The
premium is now the smallest in CMA Ltd. data going back a decade
and down from a record 2.94 percentage points in 2008.

Mexico’s sweeping constitutional laws that jettisoned its
75-year state oil monopoly and boosted tax revenue are helping
to close the gap with Chile, the region’s most creditworthy
nation. While traders are wagering foreign investment from
companies such as Exxon Mobil Corp. and Chevron Corp. will
propel growth in Mexico, Latin America’s second-biggest economy,
they’re increasingly concerned Chile will struggle to sustain
its expansion as Chinese demand for raw materials wanes.

“Investors are feeling more confident that Mexico is
moving in the right direction,” Alfredo Coutino, director for
Latin America at Moody’s Analytics Inc., a unit of New York-based Moody’s Corp., said by telephone. “Mexico has a great
possibility to implement new reforms, which in the end are going
to increase the future production capacity of the economy.”

Foreign Investment

Speculation is increasing that Mexico’s congress will
approve rules this month to implement the new energy laws
championed by Mexico President Enrique Pena Nieto. The
government says the changes will help reverse a nine-year slump
in oil output and attract as much as $30 billion a year in
foreign direct investment, boosting the long-term potential
annual growth rate by 1 percentage point. Tax increases will cut
Mexico’s dependence on oil revenue to as little as 27 percent of
the budget by 2018 from 34 percent last year.

Mexico will grow as much as 3.3 percent this year,
bolstered by U.S. export demand and record low interest rates,
after expanding 1.1 percent in 2013, the central bank said on
May 21. Policy makers will keep the key rate at 3.5 percent at
their next meeting June 6, according to all 20 economists
surveyed by Bloomberg.

“These reforms should result in more resilient public
finances in Mexico,” Alonso Cervera, the chief Latin America
economist at Credit Suisse Group AG, said by telephone from
Mexico City.

Mexico’s peso was little changed today at 12.9426 per
dollar as of 2:53 p.m. in New York.

Gap Unjustified

It costs 0.76 percentage point to protect Mexico’s dollar-denominated debt against non-payment for five years using
credit-default swaps, according to CMA. S&P ranks Mexico BBB+,
the third-lowest investment grade, while Moody’s Investors
Service rates the country one level higher at A3.

Chile’s rating at S&P is in line with China, Japan and
Saudi Arabia.

Siobhan Morden, the head of Latin America fixed-income
strategy at Jefferies Group LLC in New York, said the gap
between Mexico and Chile is too narrow and doesn’t reflect the
fundamental differences between the nations.

Even with this year’s slowdown, Chile’s economy will expand
3.4 percent, faster than Mexico’s 3 percent, according to the
median forecast of analysts in a Bloomberg survey. The Andean
nation has averaged annual growth of 4.9 percent in the past 20
years, almost double that of Mexico.

While Chile, the world’s biggest copper producer, has
enjoyed 30 years of almost uninterrupted growth that has
improved living conditions for the nation of 17 million, Mexico,
with a population of 120 million, suffered through recessions in
1995 and 2009, as well as the Tequila Crisis in 1994, when
demand for the country’s short-term debt dried up and sparked a
peso devaluation.

Debt Levels

Mexico’s debt as a percentage of gross domestic product
will be 55 percent this year, compared with 29 percent for
Chile, according to IMF estimates.

“That ratings gap reflects a huge disparity on
fundamentals,” Jefferies’s Morden said by telephone. “Chile
started its market opening and reform in the 1970s, and it had a
huge head start before everybody else in Latin America.”

“Mexico is viewed by international investors as the more
attractive market precisely because Mexico is on the other side
of the line with approval of reforms,” he said. “Mexico has
already approved reforms, which we don’t see in Chile yet. That
makes a big difference.”